Seaboard Corporation — Q3 2021 Form 10-Q
Business context and period: The filing covers the 13-week quarter and nine months ended October 2, 2021. Seaboard operates across Pork, Commodity Trading and Milling (CT&M), Marine, Sugar and Alcohol, Power, and Turkey.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $2.276 billion | $1.645 billion | $6.765 billion | $5.136 billion |
| Operating income | $112 million | $39 million | $369 million | $111 million |
| Net earnings | $94 million | $154 million | $449 million | $24 million |
| Earnings per share | $81.50 | $132.58 | $387.09 | $20.08 |
| Cash from operating activities | Not separately stated for the quarter | $96 million | $34 million |
Quarterly sales increased 38%; nine-month sales rose 32%. Operating margins were approximately 4.9% and 2.4% in the respective third quarters, and 5.5% and 2.2% for the nine-month periods. Net earnings fell in Q3 despite higher operating income, principally reflecting the prior-year period’s $56 million of other investment income versus a $9 million loss in Q3 2021. Nine-month earnings benefited from a $108 million net gain in other investment income, compared with a $41 million loss in 2020.
Q3 sales growth primarily reflected higher commodity and pork prices and increased Marine cargo volumes and rates. Improved Pork margins and Marine voyage revenue drove higher operating income. CT&M operating income declined, including the effect of derivative mark-to-market adjustments.
Liquidity, debt and cash flow
- At October 2, 2021, cash and cash equivalents were $62 million and short-term investments were $1.516 billion. Management reported approximately $1.6 billion of combined cash and short-term investments and $898 million of additional net working capital.
- Available credit capacity was $527 million under uncommitted lines and $150 million under committed lines. Outstanding lines of credit totaled $467 million; long-term debt, including current maturities, was approximately $717 million. The main borrowing was a $679 million term loan due 2028. The company reported covenant compliance.
- Nine-month operating cash flow was $96 million, while capital expenditures were $324 million. Higher inventories and receivables absorbed working capital. Cash and cash equivalents declined $14 million from year-end to $62 million; cash plus short-term investments increased $37 million.
- Total assets were $7.257 billion and total equity was $4.290 billion at period-end. Inventory increased to $1.542 billion from $1.178 billion at year-end.
Material changes, outlook and risks
- Segments: Nine-month Pork operating income rose to $242 million from $55 million; Marine improved to $95 million from a $3 million loss. CT&M operating income declined to $57 million from $82 million, and Power moved to a $10 million loss from $4 million of income. Butterball, accounted for under the equity method, reported a nine-month net loss of $36 million.
- Management outlook: Management expected positive CT&M operating income for the rest of 2021 excluding derivative mark-to-market effects, Marine to remain profitable, and Turkey to be profitable due to holiday-season sales. It could not predict Pork, Sugar and Alcohol, or Power profitability for the remainder of the year. These are segment comments, not consolidated earnings guidance.
- Investment and capacity plans: Management budgeted about $235 million of remaining-2021 capital expenditures. Operations at the Hugoton renewable diesel plant were expected around early 2022. Marine contracted for three vessels expected to cost about $60 million each, with completion expected in 2024.
- Risks: The filing cites COVID-19-related labor challenges and uncertainty, volatile commodity and feed prices, freight and fuel costs, foreign exchange and market-price exposure. Derivatives are not designated for hedge accounting, so fair-value changes can affect earnings. Early termination of interest-rate swaps increased interest-rate exposure.
- Contingencies: Pending matters include Helms-Burton Act litigation relating to the Port of Mariel, pork antitrust claims, and Cereoil/Nolston proceedings in Uruguay, including an HSBC suit seeking $10 million plus interest and other relief exceeding $3.2 million. Management said it intends to defend these cases; potential loss could not be reasonably estimated for several matters. The filing also identifies California Proposition 12, effective January 1, 2022, as a pork-segment compliance and market risk; California represented approximately 9% of direct pork sales in 2020, plus indirect sales.
- Unusual items: Seaboard increased its ownership in an Ecuador feed and hog business from 50% to 80%, paying approximately $7 million net of cash acquired. Q3 also included a $5 million realized gain from terminating interest-rate swaps during the nine-month period.
Investor verification priorities
- Reconcile operating improvement with the sharp Q3 year-over-year decline in net earnings, focusing on investment gains and losses, derivative marks, and tax effects.
- Assess working-capital demands, especially the $343 million nine-month inventory cash use, alongside planned capital spending and new Marine vessel commitments.
- Track commodity/feed margins, freight rates, fuel costs, and the effect of non-hedge-accounted derivative marks across segments.
- Review progress and cost exposure for the renewable diesel project, vessel construction, and Proposition 12 compliance.
- Monitor the outcome and potential financial exposure of the disclosed litigation; several loss amounts and probabilities remain indeterminable.